What to Make of Today’s Dour Surveys

Based on our coverage of financial publications, moods are down right now. Inflation is elevated, oil prices are up and it seems to us all eyes remain on Ukraine.^[i] As ever, though, we think a key challenge for investors is to tune that down long enough to look forward and ask, “How much of this dour news is already baked into market prices?” In our view, stocks’ drop since January largely reflects these factors.^[ii] Our research shows no market indicator will give you a perfect view of the extent to which prices reflect sentiment. But looking to what people have said in recent economic surveys can help reveal the magnitude of sentiment’s plunge following Russia’s invasion—helping illustrate what markets have pre-priced, in our view.

Even before Russia’s invasion of Ukraine on 24 February, polls we track found consumers and businesses feeling dour. The main cited reason: inflation (economy-wide rising prices). In the US, both The Conference Board and the University of Michigan’s sentiment surveys of American consumers dipped in February.^[iii] The former reported fewer consumers plan to make big-ticket purchases (e.g., autos or vacations) in the next six months, whilst the latter fell to its lowest level in 10 years.^[iv] Per a February Gallup poll, 42% of Americans described the economy as “poor” and “getting worse,” up from January.^[v] Interestingly, in our view, only 2% called “the situation with Russia” an important problem facing the US—likely a reflection of the pre-war survey period, as responses were taken from 1 – 17 February.^[vi]

We found similar themes emerged in other developed nations before Russia’s barbaric act. Research firm GfK found consumer confidence in both the UK and Germany worsened in February, with rising prices cited as the main concern.^[vii] However, surveys weren’t universally negative. The ZEW Indicator of Economic Sentiment for Germany improved in February as respondents anticipated easing COVID restrictions and an ongoing economic recovery.^[viii] In Australia, a National Australia Bank survey of business conditions rebounded in February, with firms crediting a slowdown in Omicron cases and an easing of supply bottlenecks.^[ix] Even a Financial Times/University of Chicago survey of macroeconomists conducted on the eve of war, 21 – 24 February, put “geopolitical tensions tied to Ukraine” fourth on the list of things that could pause US Federal Reserve interest rate hike plans.^[x] Whilst we don’t think that will necessarily happen, as our research shows monetary officials’ decisions aren’t knowable ahead of time, we think those answers would be much different in a poll taken today—a point more recent surveys we track illustrate well.

For example, Sentix’s Investor Confidence Index for the eurozone, taken 3 – 5 March, fell from 16.6 in February to -7.0 in March, its lowest reading since November 2020.^[xi] The gauge’s expectations index fell by -34.75 points—the largest drop in its 20-year history.^[xii] Sentix found similar results for Germany and Eastern Europe.^[xiii] According to an Infratest poll of German voters conducted from 28 February – 3 March, 69% agreed with the government’s plan to increase defense spending, with 47% citing a change in attitude due to Russia’s invasion.^[xiv] Though the majority of respondents support Western sanctions, 64% fear a deterioration in Germany’s economic situation tied to the conflict.^[xv] In Australia, a Westpac-Melbourne Institute poll taken from 28 February  – 4 March showed consumer sentiment fell for a fourth straight month in March.^[xvi] Domestic issues (i.e., inflation and floods in southeast Queensland and New South Wales) weighed on sentiment the most, but 87% of respondents were negative on international conditions—likely a sign Russia’s hostilities were hurting moods in the Land Down Under, too.^[xvii] The aforementioned University of Michigan sentiment survey for March found a similar effect on American consumers, as 24% of respondents “spontaneously mentioned the Ukraine invasion in response to questions about the economic outlook.”^[xviii] 

Now, we think it is important to note that our research shows polls don’t predict consumer or business behaviour. Just because someone says they lack confidence doesn’t mean they won’t spend or invest, and as post-invasion surveys show, feelings change quickly. But surveys are a snapshot in time, in our view. They reflect how people feel in the moment, which we think is heavily influenced by what just happened. Considering the nonstop coverage of the Russia-Ukraine conflict over the past two weeks and all the speculated global fallout amongst the financial publications we cover, it isn’t surprising for respondents to feel dour, in our view. We have seen other issues dominate financial headlines over the past 12 months, including COVID variants (and related restrictions), supply chain issues and, most recently, elevated inflation. In our view, the persistent attention on those stories puts them atop people’s minds—and likely influences survey respondents’ answers.

To be clear, the problems highlighted in surveys are real, and we don’t dismiss their impact. War is a tragedy. The disruptions to commerce hurt businesses and consumers alike. Inflation weighs on households’ finances. But from an investing perspective, we think the discussion of these issues influences and shapes expectations. Our research shows stocks move most on the gap between expectations and reality. As recent surveys show, the former are low right now. That suggests to us markets already reflect the effects of war, implying the bar for reality to deliver positive surprises on the economic front is pretty low—common during corrections (swift, sentiment-driven declines of -10% to -20% off market highs). Whilst we don’t think anyone can time corrections, this sort of deteriorating sentiment is common around their lows, in our experience.